By Jethro Wegener
So many of us shop online these days. We’re almost all connected to the net 24/7, meaning that purchases are always just a few simple clicks away. At one point, it seemed likely that online retailers would soon make bricks-and-mortar stores obsolete. That doesn’t seem so likely anymore. Let’s find out why.
Rakuten and Groupon Closures
Two major online retailers are facing serious problems. Japan’s largest online retailer, Rakuten, is shutting down its operations in Malaysia and Indonesia. Saying that their intention is to overhaul their business and focus on more profitable regions, over 150 people have lost their jobs in this move. In Singapore, they will continue to take orders, and fulfil any existing orders, until the 29th of February, before they shut their site down for good – and retrench 30 employees related to their online platform. They’re keeping Singapore as their regional HQ for the moment.
With similar motives, another online retailer called Groupon is pulling out of seven countries (not Singapore, thankfully) and cutting 1,100 jobs. Again citing corporate restructure, the move shows that both companies are obviously facing financial difficulties. In Groupon’s case, this is especially surprising, given the fact that it was once considered one of the fastest growing companies in the world, according to Business Insider. Google even offered to buy the company for USD6bn dollars at one point.
Not as Profitable as Expected
So why aren’t these multi-million dollar companies turning a profit? Research suggests that even the industry giants are struggling to get a decent turnover. Even one of the biggest and well-known companies out there, Amazon, is having trouble. The reasons why are surprisingly simple.
For one, online retailers actually take on the most costly part of the buying process – delivery. Whereas in a physical store a customer is more likely to take their purchase home themselves, online retailers are required to pay shipping and transportation costs, which can really add to their overhead costs.
Another surprising thing is that even though online retailers say that not having an actual storefront means that they forgo rental costs, thereby giving them an advantage, there is a flipside to this reasoning. They have to spend lots of money on warehouses to store their goods. Whereas brick-and-mortar operations get to expand as they grow, places like Amazon have make calculated risks on their sales and profits when buying their floor space. Sometimes these risks can pay off, and other times they could fall flat.
Even though some people assume that online retailers are better and more profitable than any physical stores, these recent issues faced by Rakuten and Groupon show that it isn’t all sunshine and roses for them. And when giants like Amazon question their profit margins, one really has to wonder if online is really the way to go.